Company Notes Digest 2.24.17

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.
Everyone is optimistic except for retailers. The data still hasn’t reflected the optimism quite yet, but it should eventually. Inflation will likely follow. Still, some early inflation indicators aren’t flashing warning signs.

The Macro Outlook:

Companies are doing better than they would have thought

“I think everybody is optimistic…it’s really not specific to one particular industry, okay. It’s really across the board and it’s across the country, whether it be if you’re on the East Coast, West Coast, the mid chapters, what have you, all of our companies are all simultaneously doing better than, frankly, we would have thought.” —Reliance Steel CEO Gregg Mollins (Steel Distributor)

Fluor thinks were at the beginning of a sustained up-cycle

“we think we’re at the absolute bottom of the cycle and what we see is an improving slate of things to chase… I think we’re kind of in the beginning stages of what I would argue would be a sustained positive capital cycle” —Fluor CEO David Seton (Engineering & Construction)

The optimism still hasn’t fully filtered into the data quite yet though

“do we feel more optimistic about 2017 than we did a quarter ago? The short answer is yes. There is considerable data that shows broad expectations for stronger GDP growth in 2017…A somewhat longer answer to the question starts with our data. Looking at group booking trends and special corporate negotiations…we do not yet have clear enough proof that GDP is in fact growing at a higher rate, or that the greater prevailing optimism is impacting our business” —Marriott CEO Arne Sorenson (Hotels)

Customers are more eager, but still acting carefully

“even though the customers are a little more eager to get some of these things done, they’re still going through what I would argue is a more detailed gating process than they’ve gone through maybe in that last boom. And I think prudently so…I think it’s just a matter of good, prudent gating processes. But as I said, we’re seeing an increase in activity.” —Fluor CEO David Seton (Engineering & Construction)

Inventories are ready to be rebuilt

“the real difference this year is, we aren’t seeing a significant decline in that retail environment year-over-year…And as a result of that we’re able to produce largely to retail demand…In a year where you start to see the retail environment improving, that’s when we would consider starting to lift that inventory level in line with that.” —Deere IR Tony Huegel (Agriculture Equipment)

Inflation should start showing up soon

“We would expect that you’re going to see a change. We already started to see it in the fourth quarter in some of the businesses. The price lag usually is several quarters for us…we’re going to have some margin pressure from inflation in the first couple of quarters…there are certain markets where we’ve clearly seen wage inflation driven by the low unemployment” —Ecolab CEO Doug Baker (Business Services)

But not all inflation indicators are flashing warning signs

Companies aren’t stockpiling inventories

“It happens all the time when price increases go up, some of the companies, the end users, they buy ahead of it. But we don’t see huge buys ahead of it that’s going to impact our inventories and then future purchases. So, I think it’s going to – it’s nothing unusual. I think it’s pretty much business as usual.” —Reliance Steel CEO Gregg Mollins (Steel Distributor)

“Bid validity” hasn’t shortened

“I would have thought that some of the pressures would have already started to creep up in terms of cost of commodities, cost of engineered equipment items and the like. But we’re in a middle of a couple of significant mid-cycles and we haven’t seen any dramatic increase or expectation of increase in terms of the bid validity from some of these vendors. In lot of cases, when you start to see inflationary pressures, you’ll start to see the bid validity on some of these things shorten. And we have not seen that phenomenon yet in the marketplace.” —Fluor CEO David Seton (Engineering & Construction)

International:

A border adjusted tax would be a big bet with unknown consequences

“Let’s say the Brady Plan with the border adjustability provision was passed. It would be favorable for us…we don’t think that’s ultimately what’s going to probably get through, but who knows? I think the bigger question is what’s its impact on the overall economy…I’m not totally comfortable with the border adjustability just as a big, big bet on a big piece of our economy and nobody knows exactly how it plays out and that seems to us unwarranted because the other parts of the proposal, we think, are almost guaranteed wins.” —Ecolab CEO Doug Baker (Business Services)

Financials:

The financial world is excited for regulatory relief

“with respect to finance, matters are changing so quickly, almost on a day-to-day basis, but it’s really the first of the year where you start to get this building momentum that there will be strong regulatory relief in the financial world and the optimism that is in some respects derived from that.” —Marriott CEO Arne Sorenson (Hotel)

The housing market is strong, especially in California

“Home buyers are beginning to realize gains on the sales of their homes, which gives them the confidence, flexibility and down payment money to trade up into one of our homes. This increased home equity, gains in the stock market, the prospects of potentially lower tax rates and less sensitivity towards mortgage interest rates, due to generally larger down payments and stronger personal balance sheets, seems to be contributing to increased demand for our homes…With respect to California, yes, hot is the right word to describe it.” —Toll Brothers CEO Douglas Yearly (Homebuilder)

Home Depot believes that 7% mortgage rates wouldn’t change much

“our analysis would show that for every 25-basis point increase in mortgage rates, it costs the homeowner who’s applied for a mortgage $40 more per month. So that helps sort of dimensionalize the pressure associated with rising rates. With the median home price in the country of $250,000, mortgage rates could go up to 7-ish percent before the Affordability Index would fall at 100 or below. So there’s a way to go before we’d be concerned. And you know what, mortgage rates stand today at 4.2%, 4.3%, something like that, the historical mean is 5.8%. So even if a return to the mean, you’re still below that inflection point.” —Home Depot CFO Carol Tome (Home Goods)

Consumer:

Macy’s sounded defeated

“we were not able to overcome the secular changes in the industry related to shopping habits. These changes appear to have had a bigger impact on our store business than we had expected. We recognize we need to make dramatic changes in how we operate the business.” —Macy’s CFO Karen Hoguet (Retail)

Older retailers want to believe that brick and mortar still has a purpose

“The Supercenter remains the best retail format in the world, and going forward, we will continue to leverage these unique assets, even more with initiatives like online grocery, in-store pickup and others. Rapid advances in technology mean we need to become more of a digital enterprise – and that’s what we’re doing.” —Wal-Mart CEO Doug McMillon (Retail)

“Our overall perspective though and the importance of our store portfolio remains the same. We believe stores are very important and critical component of our future success, and we’re committed to leverage them to their full extent. There’s great power in stores in an omnichannel world.” —Kohls CEO Kevin Mansell (retail

“I’ve said this before, if the department store did not exist today, there’d be a group of smart people sitting in Silicon Valley inventing the department store today, because it will serve a purpose.” —Macy’s CEO Terry Lundgren (Retail)

Retail lenders are getting concerned

“We are nervous about retail and restaurants frankly these days because we’ve seen a weak consumer, and in retail in particular we’ve seen real changes in the way people buy things, i.e., online versus in stores and in malls in particular.” —Ares Capital Corp CEO Kip deVeer (Business Development Co)

Technology:

Ecolab sees a big opportunity to monetize customer data

“I think the opportunity to use the information that we already capture within customers much more effectively to drive value, merchandise the value we create, develop new opportunities and ways to help customers obviously with their full partnership represents a huge opportunity for the company. Whether it’s specifically monetizing the information, i.e. charging for it or it’s instead used as a means of us better helping customers and being more valuable, I think it’s probably the latter. It’s my guess as we move forward. We’re in early innings. We certainly do it in many instances today, but I think our ability to up our game there is fairly dramatic…So the hard part is capturing the data. Connecting to the cloud isn’t technically very complicated, and that’s the work that we’re doing. And then synthesizing it, rationalizing it, making it valuable for customers is, like, real work, and we’re partnering with some great partners to learn how to do this and improve our capabilities there, which I think we’ve talked about. I mean Microsoft is a company that we’ve been leveraging there in many ways, sales force and other parts of our business, and we’ll continue to do that as we move forward. So I think it’s going to be huge for the company. It will not impact material 2017. I’m not even sure it will materially impact 2018, but in the not too distant future it’s going to be a core way of us doing business.” —Ecolab CEO Doug Baker (Business Services)

“we are encouraged by early signs of life in the energy market. In regard to energy, the general consensus from our customer base throughout the country is more positive today than it was 90 days ago. We’ve been seeing improved quoting activity and order flows, though order sizes have been much smaller.” —Reliance Steel CEO Gregg Mollins (Steel Distributor)

“I mean I think there’re two energy markets right now. North America is clearly turning and the rest of the world has not yet turned and probably we won’t expect to see a turn there until the second half of this year. But with that said, I think our view on the Energy business is clearly more favorable than the last couple of years.” —Ecolab CEO Doug Baker (Business Services)

Even the mining industry may be turning

“I think mining improved dramatically throughout the year, but it was still down mid-single digits in the fourth quarter. We would expect mining to probably trip into positive territory, either Q1 or Q2 latest, as we go through this year.” —Ecolab CEO Doug Baker (Business Services)

Miscellaneous Nuggets of Wisdom:

Competition is good in a new market

“DIRECTV NOW launched at the end of November. And my take on what we saw is an expansion of the OTT market by their entry. So we didn’t see through the quarter any change in the momentum that we had on Sling TV including in the month of December after they launched. We know that they added a lot of subscribers in that month. So our hope, we’ve been expecting more competition for quite a while for Sling TV, and our expectation has been that as new entrants enter the market, the market just expands faster, which is typically what you see in early-stage markets like this.” —Dish Roger Lynch (Satellite TV)

Strike when your competitors are distracted

“I would say over the years in a number of instances we’ve had situations where competitors go through the distraction of either a large acquisition and/or being sold or bought or whatever you want to call it. In all cases, we do view that as an opportunity, and we try not to miss those opportunities as we move forward.” —Ecolab CEO Doug Baker (Business Services)